Question

What is interest rate future contract? Give an example of how to use a interest rate future contract to manage risk of an investment position in financial market.

Answer 1

Interest rate future is a futures contract with an interest-bearing security as the underlying instrument. Interest rate future is used to hedge the risks on future interest rates changes. It can be used for speculation also.

For example : For the investors holding a long position in a bond can use it as a tool to hedge the risk of rising interest rates. When the interest rates rise, the value of the bonds fall. Then the investors can sell interest rate futures to adjust the loss in value of bonds they hold.